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Currencies

China capital curbs reflect buyer’s remorse over market reforms

Last year the reformist head of China’s central bank convinced his Communist party bosses to give market forces a bigger say in setting the renminbi’s daily “reference rate” against the US dollar. In return, Zhou Xiaochuan assured his more conservative party colleagues that the redback would finally secure coveted recognition as an official reserve currency […]

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Capital Markets

Mnuchin expected to be Trump’s Treasury secretary

Donald Trump has chosen Steven Mnuchin as his Treasury secretary, US media outlets reported on Tuesday, positioning the former Goldman Sachs banker to be the latest Wall Street veteran to receive a top administration post. Mr Mnuchin chairs both Dune Capital Management and Dune Entertainment Partners and has been a longtime business associate of Mr […]

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Banks

Financial system more vulnerable after Trump victory, says BoE

The US election outcome has “reinforced existing vulnerabilities” in the financial system, the Bank of England has warned, adding that the outlook for financial stability in the UK remains challenging. The BoE said on Wednesday that vulnerabilities that were already considered “elevated” have worsened since its last report on financial stability in July, in the […]

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Currencies

China stock market unfazed by falling renminbi

China’s renminbi slump has companies and individuals alike scrambling to move capital overseas, but it has not damped the enthusiasm of China’s equity investors. The Shanghai Composite, which tracks stocks on the mainland’s biggest exchange, has been gradually rising since May. That is the opposite of what happened in August 2015 after China’s surprise renminbi […]

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Categorized | Capital Markets, Currencies

Mario Draghi’s difficult juggling act


Posted on November 29, 2016

The calendar is not kind to the European Central Bank. A week on Thursday, its governing council will deliberate, just days after Italy’s vote on constitutional reform, and a week before the bank’s US counterpart holds a meeting which could move the world’s bond and currency markets.

Temporal pressure of another kind is also building, as the ECB buys €80bn of bonds each month in a programme that runs until March. Extending it could create a new problem, as there may not be enough German Bund’s available next year to keep the ECB’s spending on the eurozone member country’s debt in line with a carefully agreed formula.

So Mario Draghi, head of the bank, must somehow ensure stability following a referendum many expect the Italian government to lose, without unduly favouring that country’s sovereign bonds. He must try to keep borrowing costs suppressed across a continental economy where inflation is absent, while also keeping banks healthy and profitable so they lend to businesses and consumers.

The ECB must also stay credible to bond market investors and traders who were disappointed by the size of stimulus a year ago, while placating those within the institution who fret about the extraordinary measures it has taken already. All while anticipating any effect the Federal Reserve may have a week later.

A US interest rate rise is about as close to a sure thing as market prices get, but the message on how fast future increases will arrive, and how high they might go, could have dramatic implications. If accelerating US inflation is in focus, meaning higher bond yields lie ahead, a stronger dollar will help European exporters. Parity between the dollar and the euro might beckon. Yet if markets have got carried away with prospects for both inflation and a response from the Fed, the euro could soon reverse course.

So what can Mr Draghi do? An official forecast for headline inflation in 2019 to hit 2 per cent might help to remind investors that inflation will one day return.

Another option is to extend ECB bond purchases, but at the €60bn a month pace at which quantitative easing began. A taper presented as a tweak, it would at least buy that most precious commodity: more time.

dan.mccrum@ft.com